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Bill Gross: Covenant-Lite Loans Enters Bubble Territory

“Many financial commentators are concerned about banks loosening their standards on loans, and Bill Gross, chief investment officer at Pimco, is one of them.

“There are bubbly aspects in the terms and conditions of bank loans,” he told CNBC.

Financial institutions are issuing covenant-lite loans at a record pace. Covenants are financial restrictions placed on companies that borrow to give lenders assurance that they will receive their money back. Covenant-lite loans carry fewer of these restrictions.

U.S. cov-lite loan issuance totaled $83.6 billion for 2014 through mid-June, up 41 percent from $59.4 billion in the same period of 2013, according to Dealogic, CNBC reports.

“There can be easy types of covenants and restrictions,” Gross said. “Certainly the Fed sees, and we see as well, that over the past 12 to 18 months those standards have eased and perhaps are a little bit bubbly.”

He maintains that the prices of most risk assets stand at a “normal level if the new neutral [level for federal funds] stays low at 2 percent, which is where we expect.”

The Office of the Comptroller of the Currency, which regulates banks, also is concerned about the easing of banks’ lending policies….”

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